Who Uses Payday Loans and Why?

Recently, the payday loan industry has been scrutinized for unsavory practices, which may lead some people wonder why anyone uses these services at all. With so much negative press condemning the industry, it makes it hard for those who have never used such services to understand how lenders are keeping their businesses alive. Is the payday loan industry surviving the media onslaught or are their services becoming obsolete?

Many may be surprised to find that 6 % of the Americans from multiple demographics across the nation have utilized payday advance services in the past five years, according to a recent PEW study. Although it may be shocking to those whose only exposure to the industry is through negative media portrayals, the payday loan industry is apparently thriving despite the scrutiny.

What many fail to understand is that the industry acts as a safety net for individuals across America. Many people face unexpected life situations that drive them to the payday loan lender. From sick kids to broken down cars, unpaid electric bills to a need for groceries, these convenient and quick loans are used for a variety of legitimate reasons. As such, the industry provides a service for individuals who may otherwise be forced to go without. This is particularly true for people who have little or less-than-perfect credit. Lenders do not conduct credit checks; the only stipulations for borrowers is that they must be employed and have a bank account with direct deposit. If they meet these criteria, borrowers can acquire a small loan that may be the very thing that helps them survive between paychecks.

Admittedly, payday loans are expensive in the long run and many people become dependent on them by entering a cycle of repeat borrowing that is difficult to break. Because these loans have short pay back periods and incredibly high interest rates, borrowers often cannot pay back the loan in full and on time, as agreed upon in the loan contract. To surpass this conundrum, individuals often roll over the loan into the next week. This can cause a surplus of financial problems, including severe credit damage if the loan isn't repaid.

This leads many to criticize the industry as predatory, yet the label may not be entirely warranted. Payday loans have high interest rates because they are high risk; there isn't a credit check to determine likelihood of repayment. Also, the loan is granted with the expectation of full, timely repayment. As such, it isn't the lenders fault if the contract isn't upheld by the borrower. For responsible borrowers, the services can be invaluable.

So who is most likely to use these services?

Women in the 24-40 year-old age demographic who do not own property and earn less than $ 40,000 annually are the most frequent patrons of payday advance services. Furthermore, they generally do not have a four-year college degree and are often divorced or separated with children. When considering these statistics, it is clear that there is a correlation between lower income families and the use of payday advance services.

It is a fair assumption that most people would rather not borrow money, whether from a loan lender, credit card, family member, or elsewhere. The reality of the situation, however, is that the combination of low education and low income careers with the high cost of raising children leads many women in the aforementioned age group to seek out financial assistance. In a perfect world, the industry would not be necessary, but in the current economy, it is clearly a relevant and beneficial service when used responsibly.